At a time when it is seen to be making a concerted effort to plug attempts at tax avoidance by companies, the finance ministry has decided to shelve a proposal by state-owned India Infrastructure Finance Company Ltd (IIFCL) to move its UK-based subsidiary to a more favourable tax destination, the Netherlands.

“We did not want to send a wrong signal to the United Kingdom that the company was moving only due to tax benefits. It could have impacted bilateral relations between the two countries,” a senior government official said.

IIFCL had last year proposed relocating its UK subsidiary to the Netherlands due to the latter’s favourable tax regime that includes a corporate tax rate of 20 per cent for income up to 2,00,000 euros and 25 per cent above it, as compared to the UK’s average tax rate of 24 per cent on corporates.

Further, the Indo-Dutch double tax avoidance agreement also provides the benefit of being designation as a ‘most favoured nation’ with respect to dividends, interest and royalty earnings.

Accordingly, if an Indian company owns 10 per cent capital in a Dutch company, it has to pay a reduced tax rate of five per cent on dividends received from the Dutch firm.

“We decided not to go ahead with the relocation as tax provisions should not be the sole basis of such a move. We will continue to work out of London,” confirmed SK Goel, chairman and managing director, IIFCL.

He also said the infrastructure financier is now considering opening another subsidiary in Singapore or Hong Kong to tap the Asian markets.

“There is potential for raising a lot of funds in the Asian Markets. We have already done a survey on opening a new arm in either of the two countries,” Goel said, adding that a decision is likely over the next one year, adding that approvals from the IIFCL Board, finance ministry and RBI are yet to be taken.

IIFCL’s UK arm was set up in London in 2008 with a $500 million authorised capital with a line of credit from the Reserve Bank of India.

The wholly owned subsidiary – IIFC (UK) Ltd borrows a part of RBI’s foreign exchange reserves and then lends it to Indian infrastructure firms for importing machinery to India.